How to Finance a Turnaround


CFO Studio Magazine, 4th Quarter 2012
By Andrew Savadelis, CFO of Lumenergi


When looking to fund the turnaround of a company, there are numerous types of inves­tors to consider. These include commercial banks, venture banks, private equity (PE), mezzanine players, venture capital (VC), venture debt, angel investors, and more. While many of these purport to play in a variety of spaces, the reality is that they rarely venture (pardon the pun) far beyond their comfort zone or base invest­ment profile.

In the case of small- to mid-sized compa­nies that are turnaround candidates, the party is very quickly whittled down to the private equity and venture players. From there, it depends upon the size and stage of the company. If the organization is generating revenue, then the full gamut of the PE to VC community is available to court.

If the company is sans revenue, but has other attributes, such as strong technology, and is at an early revenue stage, then the PE players tend to drop off and the primary pitch is to the venture capital and possibly the venture debt community.

But in all cases, the investors are making an “educated bet” in three primary areas:

  • Management/team capability and experience
  • Markets
  • Product or service differentiation

In my experience, the investors overwhelm­ingly are making their investment decisions on the perceived ability of management. After they vet the markets and products, the question is whether the investors believe management has the industry and operating experience to execute the turnaround plan and deliver results within the time-frame expected.

Further, potential investors want to know whether the management team has the capability to think on its feet and react to issues and concerns that inevitably arise in any company, let alone under the added pressures of a turnaround situation.

So what does it take to convince inves­tors to put up new money in a company? A well-vetted plan with financial projections that takes into account the current cash burn along with the expected cash burn. This must also include how the team is going to re-market or position the company, plus what an exit strategy and related timing would look like.

It requires that all of the management team be well-versed in the plan, cohesive in their agreement on the plan, and able to deliver the plan to investors, albeit from their respec­tive roles within the company. During the fund-raising process, the management team needs to appreciate the fact that they are always “on.”

A Personal Experience

In one situation, we had two major investors lined up and in the final due diligence phase. Then, during a dinner meet­ing, the senior scientist spent an hour in a side discussion telling one of the partners of the investing group how dif­ficult it was to do our process and keep things straight.

That consortium of inves­tors literally fell apart the next day, and it took another three months to find another investor to close the deal. When asked, “What were you thinking?” the scientist responded, “I did not realize dinner was part of the business meeting [scheduled for the next morning].”

I almost asked, “Are you kidding?”

The net of this experience is that you must be prepared for anything. Often non-financial types do not understand the process or the mindset of the investment community.

The team also needs to understand that investors, and especially potential new investors, are looking for a reason to not invest and move to the next candidate company on their list. So a key to the company successfully wooing new investors is to have some success in implementing its plan, i.e., doing what you said you were going to do, and within a relatively reasonable time-frame.

While this has always been a key factor in attracting new investors in a turnaround, in today’s financial markets where many venture capital firms are keeping their powder dry for current portfolio companies, it shows that a viable plan has become of even more importance.

In my current company, our new manage­ment team came on board in March and we immediately implemented a plan to re-brand and reposition the organization in the market, as well as rebuild the sales force and agency network that the company needed in order to realize any level of sales.

The normal sales cycle in our industry is a minimum of nine months, with more than 12 months common, so we put a financial plan together that allowed us to prove the concept of the company and establish a credible sales fun­nel. This provided the cred­ibility to market and allowed us to sell the company to new venture capital and venture debt investors.

As we have progressed over the last six months, we have in fact built the sales funnel as projected, run the operations tightly but not oppressively, and have attracted significant interest from new investors. It is also critical that the current investor group back the company as well; however, in many cases, the current investors often need new investors to come in as a way to solidify and prove within their own partnerships that con­tinued investment is a worthwhile endeavor.

Private Versus Public

Much of this advice is oriented toward a private company. Public companies in the turnaround mode have a somewhat easier time of attracting potential investors, primarily because they have a readymade exit strategy. In the private world, the lack of a readily available market means that the inves­tor may have to hold the investment much longer than planned.

In a public company, although the report­ing and disclosure issues are much more stringent, the ability to exit their investment at almost any time creates the perception that the investment is more liquid and hence somewhat less risky.

Once one or more investors have decided to invest in the company, a key issue involves the valuation, or price the investor will pay.

If the company is public, the valuation question is relatively straightforward and revolves around the level of discount from market that the management team and board are willing to accept and comfortable with, and will normally range from 5 to 10 percent, although deeper discounts are not unusual.

If the company is private, the pricing will depend upon numerous issues. Although existing shareholders would prefer an “up” round (increase in share price and valuation), if the company is in the first stage of a turn­around, a “down” round and recapitalization of the company is not unusual.

It is also one of the few times that a new management team coming on board has leverage over the amount of ownership they can negotiate. In a recapitalization, the pricing is usually highly negotiated. If the company is already in a positive phase of a turnaround, the pricing will usually be an up round, but how much will depend upon how far along and successful the turnaround plan is, and how badly new money is needed to keep the company moving along.

Regardless of whether the company is public or private, tech or non-tech, big or small, profitable or not, the one thing to always remember: The deal is not done until the money is in the bank.

Until then, anything — and I mean any­thing — can kill the deal.

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Raising Money as a New Company


CFO Studio Magazine, 4th Quarter 2012
By Bert Marchio, CFO of Edge Therapeutics

If you face the challenge of raising money for an established company, you can gener­ally rely on your firm’s numbers to make your case.

For example, an investment-grade com­pany can use its earnings and credit ratings to prove its worth. A company with a non-in­vestment-grade credit rating or no rating can focus on its EBITDA multiple or assets such as accounts receivable, inventory, real estate, and intellectual property.

But if you’re working with a company that’s just starting out, one that hasn’t gener­ated any revenue yet and has no tangible assets to borrow against, it would seem that your options are significantly limited. In such a situation, how do you raise money?

Start by Selling Yourself

If you don’t have trailing EBITDA or assets to offer, you will initially be selling your management team and your vision.

Who’s likely to buy your story? Your best candidates are:

  • You and the other members of your management team.
  • The people most likely to believe in you: your family and closest friends.

So get ready to use a home-equity line, dig into your savings, and buttonhole your rich uncle or father-in-law as soon as you can.

Your Next Steps

As your company grows, you’ll need to find new sources of funding to fuel that expan­sion. Possibilities include:

  • Angel investors
  • Government or foundation grants
  • Venture capital firms
  • Hedge funds
  • Private-equity investors
  • Strategic investors

You’ll need more sophisticated tools to convince these sources to invest: an elevator pitch, a mission statement, and a very refined PowerPoint presentation summarizing your company’s unique features.

Your ability to sell your vision and your management team will be critical to your success. Just as important will be your ability to show your investors how they will benefit from your success. Understand that financial return may not be the only consideration for every investor. If you have a potential investor who lost a child to a fatal disease, the fact that your company offers the hope of a cure for that disease might be key. Similarly, a new field treatment for soldiers wounded in combat might help you land a Department of Defense grant.

When courting investors, review things that reduce the investment risk, such as:

  • Your management team’s previous success in similar enterprises.
  • Your team’s focus on minimizing the company’s “burn rate” and spend­ing only to drive value growth while preserving resources (e.g., reducing overhead by operating as a virtual company).
  • Unique technology your company offers; regulatory barriers or other obstacles that will hinder the success of or eliminate competitors.
  • Established market demand for your company’s offerings.
  • Multiple exit opportunities for investors.

Attracting leaders in your industry to your board as key early investors will greatly help you bring others into the fold. These high-profile investors provide a “Good Housekeeping seal of approval” and give others the comfort of knowing that there’s “adult supervision” on your board.

Finding These Investors

Network, network, network, and not just with Financial Executives International (FEI) and the Financial Executives Networking Group (FENG). You’ll need to get out of your FEI and FENG finance-focused comfort zone and get involved with organizations in your industry, government-sponsored groups that support early-stage compa­nies, and other centers of influence (for example, lawyers, accounting firms, consulting firms, etc.) with connections to high-net-worth individuals and investment firms.

Beggars can’t be choosers. Nevertheless, you’ll want to know whether potential investors bring anything to the table besides money. For example, are they opinion leaders? Do they have reputations for being able to identify good investments at an early stage? Do they have great track records?

As your firm and story develop, pre­senting your company at an investment conference or an industry association meeting may help you attract larger investors or strategic partners that may wish to buy into the economic promise of your product. A big pharmaceutical company or a tech giant, for instance, might want to partner with you if you’ve developed something of inter­est in their field.

And don’t neglect to cultivate key vendors who may benefit significantly from your firm’s success. For example, contract research organizations may deeply discount their services in exchange for an equity stake in a pre-revenue company.

Finally, get to know the investment bankers who specialize in your indus­try and focus on early-stage companies. The best ones will understand your vision, present you with good ideas and honest feedback, and help you raise capital. The ones you want to avoid will focus on “doing a deal” regardless of whether it’s in your best long-term interest.

What About Borrowing?

If you’ve successfully raised equity and are not rapidly burning through your investable cash, you now have an asset that banks can lend against. But you will pay to borrow your own funds.

If your firm’s intellectual property has progressed to the point where a secured lender (e.g., hedge fund) may be willing to lend against that asset, carefully consider the terms of the loan: What if Murphy’s Law holds and timetables slip? Generally you’ll find yourself using equity or equity-like products to capitalize a pre-revenue company even though they are more expensive than debt instruments.

That’s how it is when your company is young and has yet to make its mark in the marketplace.

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Steady in a Storm


CFO Studio Magazine, 4th Quarter 2012
By Alex Palmer


Unprecedented change. Those words apply to every aspect of the business of health insurance in 2012. Each consumer sees opportunities or new costs ahead. Every company is facing pricing changes, difficult benefits decisions, and risk assessments. Financial executives at companies of every size are finding themselves often with more questions than answers. And Dave Huber, CFO of Horizon Blue Cross Blue Shield of New Jersey (Horizon BCBSNJ), the largest health-care insurer in the state, is in many ways right in the eye of the health-care reform storm.

The storm has been gathering for four years, ever since President Obama took office and wrestled through Congress legislation — the Patient Protection and Affordable Care Act (PPACA) — that attempts to rein in high medical care costs and extend care to unin­sured Americans without changing how most working people obtain coverage. Even now, plenty of questions remain about precisely how these reforms will be implemented on the state and federal levels.

Navigating a major insurance company through the potential risks raised by the PPACA in a bad economy and a thick fog of uncertainty would make the average person have trouble sleeping at night. But when Huber discusses these industry-shaking developments, it is with the unruffled ease of a man who is comfortable with change.

“This is a seismic shift with an awful lot of uncertainty,” says Huber. “[But] I thrive on opportunities and I like to work in this kind of environment where there is a lot going on and there is a chance to do things differently or do things better.”

Huber has served as CFO since April of this year, when he took over from his longtime mentor, Bob Pures, with whom he had worked closely for years as vice president of finance. Serving more than 3.6 million members throughout the state, his company is moving fast to adjust its entire approach to the new insurance landscape — one in which millions of individuals will for the first time be selecting their own plans.


From Wholesale to Retail

The biggest shift for which Huber must plan is the expansion, legislated by the PPACA, of the number of individuals receiving coverage. Under “Obamacare,” companies with more than 50 full-time equivalent employees are required to provide health insurance for their workers or pay stiff fines (starting at $40,000 and going up from there, depending on com­pany size). For organizations with fewer than 50 employees, the responsibility to maintain minimum essential health insurance falls on the individual workers themselves, and they too can incur a financial penalty if they do not comply. (This is known as the individual mandate and was upheld by the Supreme Court in June.) New Jersey, a state of 8.8 mil­lion individuals, had an average of about 1.3 million residents uninsured between 2009 and 2011, according to U.S. Census data, most of whom will be expected to enter the insurance system within the next few years.

For Horizon BCBSNJ, this moves the company’s primary customer base from corporations to individuals.

“Historically our business has been a wholesale business where mostly we sell to group customers,” says Huber, whose full title is senior vice president – administration, chief financial officer, and treasurer. “In the new world, it’s a combination of wholesale and retail, where we are going to be doing much more direct-to-consumer.”

The looming deadline for Huber and other insurance providers is the start of 2014, when health insurance exchanges, in which the government will provide subsidies to uninsured or under-insured individuals who purchase their own insurance, are expected to be operational. Customers will buy their insurance directly over the web, as many do now with automobile insurance. But while the PPACA outlines the creation of health insurance exchanges, it leaves the nuances of how they will operate to the individual states, which can elect to self-operate the exchanges, or leave operation to the federal government, or do a combination of both.

New Jersey, along with 33 other states that have received grants for these exchanges, has until November 16 to declare whether it will implement its own statewide marketplace or join a federal one. At the beginning of Octo­ber, the bill for a state-run exchange passed the Senate with no Republican support. Advocates of the bill maintain that a state-run exchange will allow New Jersey to have more control over how their state’s exchange is implemented, while those in opposition sug­gest that the state should wait and see what the federal government offers.

Horizon BCBSNJ will have insurance products on the exchange, and therefore Huber has to prepare the company for each of the possibilities foreseeable under the PPACA. The company has conducted exten­sive scenario planning to understand how it might compete under a variety of different outcomes with regard to the health insur­ance exchanges. His team must consider how competitors might price their products and services in a market that has never existed. Determining how Horizon BCBSNJ can capture market share and balance that against potential risk, while remaining nimble enough to adapt when reality turns out differently than their simulations predicted, is keeping Huber and his team very busy.

“The law is written at a very high level, supported by regulations, and we’re trying to build something to compete in the market­place in 2014, which really means we have to go live in October of 2013, but we really don’t know what any of the rules are,” says Huber. “Frankly it’s a very challeng­ing environment, because there’s so much uncertainty about the future.”

Adding to these vari­ables, experts predict the changes ushered in by the PPACA are also expected to spur M&A activity as margins shrink across the insurance industry.


Business Challenges

It need hardly be said that Horizon BCBSNJ is not the only insurer concerned about the direction of the industry. At a conference in Las Vegas this past February, Aetna Presi­dent Mark Bertolini told the audience that, “The system doesn’t work, it’s broke today. The end of insurance companies, the way we’ve run the business in the past, is here.” He expressed particular concern about the ban on medical underwriting, as well as the minimal medical loss ratio requiring insurers to spend 80 to 85 percent of their premium revenues on claims and quality improvement, put forward by the Affordable Care Act.

For Huber, the biggest challenge may be the sheer length of his to-do list. “Our project appetite is insatiable,” says Huber. “We’ve got limited resources, so we need to prioritize based on the most pressing needs and where we expect to get the ROI.”

To figure out what to tackle first, Horizon BCBSNJ created a group called the Office of Healthcare Reform (“It sounds like the government,” Huber jokes). The Office is responsible for determining what steps the company should take to implement every aspect of the PPACA rollout.

Among these preparations for the changes in insurance has been a greater investment in technology and data gathering to help Hori­zon BCBSNJ understand who the company’s potential customers might be, how to segment its market, and what messages might best work for its customers. With the number of transac­tions online, over the phone, and elsewhere expected to increase significantly, Huber has worked with other departments to automate service and reduce costs where possible.

Employers and plan sponsors are increas­ingly passing more costs to employees, and some will likely continue this pattern. A survey by the National Business Group on Health, released in August, found that large U.S. employ­ers consider consumer-directed health plans and wellness initiatives more effective in controlling costs than shifting costs to employees. That being the trend, an unprecedented amount of plan cost and information must be available to support individual consumer decision making, whether through web, mobile, or social media channels — a step financial executives in every sector will be increasingly expected to take as reforms continue to roll out.

Not to lose sight of another group of the insured and about-to-be-insured population, there is expected to be continued growth of the Medicaid market segment. Horizon BCBSNJ’s enrollment saw its largest numeric increase for 2011 among its Medicaid members, which grew by 66,000 (a 13.9 percent jump), along with an additional 7,000 new Medicare Advantage customers, according to the company’s annual report. This part of the company’s business has the potential to achieve explosive growth — but there are questions about how that will happen, too.

The Supreme Court’s decision to allow states to decide whether they would accept billions of dollars to expand Medicaid to cover anyone earn­ing less than 133 percent of the Federal Poverty Level, rather than requiring states to do so, leaves open the possibility that New Jersey may have the full cost of covering new enrollees paid from 2014 to 2016, or that New Jersey Governor Chris Christie might reject the grant, maintaining the state’s current Medicaid levels. About 1 million New Jersey residents are now enrolled in Medic­aid, and that number is expected to rise by more than 400,000 by 2016, but the chief justice’s pronouncement that “states must have a genuine choice” leaves Huber and Horizon BCBSNJ with another very big question mark above their plans.


A Focus on Flexibility

As key Horizon BCBSNJ staff members take steps to ensure they are well-prepared for the shifting insurance landscape, the massive changes are also giving the company the op­portunity to rethink some of the presumptions on which the industry has operated for de­cades. For example, while health-care reform has already expanded access to care, it has hardly stemmed rising costs, with an average rise of 9 percent on health insurance premiums in 2011, according to Robert Marino, CEO of Horizon BCBSNJ.

“The average family of four paid more than $19,000 a year for its health insurance,” stated Marino in the company’s annual report. “In a weak economy, where many consumers face significant challenges in meeting basic needs, rising health-care costs only exacerbate an already difficult situation.”

For this reason, the insurer’s Horizon Health­care Innovations (HHI) team has engaged in aggressive outreach to physicians and other health-care professionals to offer increasingly flexible, collaborative approaches to providing care. These models include the Patient-Cen­tered Medical Home (PCMH), which coordi­nates care across all aspects of the health-care system — hospitals, nursing homes, pharma­cies, and the patients themselves — in promot­ing the prevention of disease and management of chronic illness. In 2011, HHI reported that PCMH members experienced an 8 percent improvement in managing their diabetes, a 10 percent lower cost of care for all members, and 26 percent fewer visits to emergency rooms.

Another model is the Accountable Care Organization (ACO), which ties provider reimbursements directly to performance met­rics. Horizon BCBSNJ has also rolled out the Episodes of Care programs in which one entity receives a fixed reimbursement to cover all costs from preadmission care to surgery to post-discharge care.

“The care philosophy underlying each of these models is that by improving the coordina­tion of our members’ health-care needs, it is possible to provide them better overall care and to lower health-care costs,” said Marino in the company’s annual report.


Calm Outlook

When he comes to work each day, Huber watches upticks and plunges in the financial markets. Horizon BCBSNJ, like all insur­ance companies, has to determine how to continue boosting its investment income in a period of historically low interest rates, without taking on too much risk.

“We have to fully understand all the risk we are taking and balance out that return,” says Huber. “In my role, people look at me and take cues from me, so if I’m at least outward­ly calm, it helps other people focus on what we can do, instead of focusing on things that are outside of our control.”

It is an outlook he has earned through trials that occurred earlier in his career. An accounting student at Lehigh University in Bethlehem, PA, Huber joined Arthur Ander­sen after graduating college. He worked hard and Andersen kept promoting him. Over his 16 years with the firm, Huber rose to partner.

But following the 2001 revelations that energy giant Enron had been sustaining itself through systematic fraud, Andersen’s role as the company’s auditor, and accusations that the company had been complicit in Enron’s malfeasance, proved fatal to the 89-year-old firm. Within months, Andersen went from an organization employing 85,000 people, to a company of several hundred.

“That was a pretty big shake-up in my world,” says Huber.

In the midst of this turmoil, Huber found opportunity. Bob Pures, the longtime CFO of Horizon BCBSNJ, reached out to Huber, whom he had known professionally. Horizon BCBSNJ was planning an initial public offer­ing, and Huber seemed a good fit to join the team as vice president of finance, to deal with Wall Street, strengthen the company’s process­es, and build forecasting models to assess the best path forward — all areas in which he had experience from his time at Andersen. Huber jumped at the chance, and while ultimately the company didn’t follow through with its plan to go public, Huber’s work impressed Pures and other company leaders.

Huber faced another test when the economy tanked in 2008, and suddenly Horizon BCBSNJ, a company that had been steadily growing, began to lag. Working with Pures and the other senior leaders, Huber took steps to reduce costs in the short term while positioning the company for growth in the long term, with positive results. Indi­viduals enrolling in the company’s managed care, pharmacy, and dental products through multiple network systems increased 65,000 in 2011, according to its annual report.

“We can point back to that and say, ‘We weathered the storm, we know we can do this,’” says Huber. “If you’ve been through it already, you can point back to examples, and people almost always just say, ‘We know the drill.’”

Since stepping up to the CFO role, Huber has made a point of conferring with other department heads and senior vice presidents to learn from them areas in which they needed the finance team to focus. He drew on these numerous conversations and myriad goals and distilled them into three main priorities that would be easy points of reference for each of the 10 departments and 350 employees within the Finance and Administration division.

“Now we’re able to articulate at town meetings and leadership meetings and so forth that this is what we stand for, and we’ve crafted common messages around what we aspire to do,” says Huber. He sum­marizes his three points as: Great People, High-Quality Work, and Strategic Business Partner. “If we create this vision, it will bring great people to create consistently high qual­ity work and serve as a strategic business partner to our customers,” he says.

Now, with the many uncertainties surrounding the implementation of the PPACA, “there are a lot of people who have been in this industry a lot longer than I have who say, ‘This is the biggest change we’ve ever experienced,’” says Huber.

Huber’s steps to understand his company from the foundation up, along with his past experiences, have prepared him for whatever the next quarter, election cycle, or Supreme Court decision may bring.

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